Wednesday, 23 November 2011

What are the advantages and disadvantages or merits and demerits of gold standard

Gold standard had worked successfully in different parts of the world between 1816 to 1914. Following are the main advantages of gold standard.

1. Inspires Confidence :-
Gold standard receives the confidence of the public much more easily and quickly than any other standard.

2. Price Stability :-
Gold standard provides stable price level in the country. When the country is on gold standard, currency can not be over issued. So prices remain stable and there is no danger of hyper inflation.

3.Universally Acceptable :-
Gold standard provides currency which is universally acceptable. Because gold possesses all the qualities of good money material and it is also accepted as a value measure in all the world.

4. Importance For International Trade :-
Gold standard is very useful for the settlement of international transactions. In international dealings gold standard provides stability of exchange rates.

5. Objective Standard :-
Gold standard is an objective standard. It can not be secretly tempered with by the independent will of the government.

6. Automatic Standard :-
Gold standard is an automatic standard. The deficit or surplus in the balance of payment is automatically brought into balance by import or export of gold.

7. Simple Working :-
There is no complication in this system. It is so simple that a common man can easily understand its working.

8. Stability In Exchange Rate :-
It ensures stable exchange rate for all the countries which are on gold standard. If some time there is difference in the mint par and market rate of exchange it is automatically corrected by the import and export of gold.

After the world war most of the countries on on gold standard did not obey the rules of gold standard and even all the new forms of gold standard failed to function smoothly. Following are the main defects of this system.

1. A Fair Weather Standard :-
One serious defect in this system is that it a "Fair weather Friend. It works smoothly in the period of peace, and prosperity while in the period of war and economic crises it has always failed.

2. Expensive Standard :-
Gold standard is an expensive standard because a lot of precious metal is wasted. It is a luxury which all the countries can not afford.

3. Sacrifice Of Internal Stability :-
Gold standard sacrifices the internal stability to external stability. In order to stabilize the external value of the currency, one country has to adjust its internal prices according the prices prevailing in other countries.

4. State Anarchy :-
Hawtery calls the gold standard the state anarchy in world credit control. He says that if some gold using countries are in the grip of inflation the germs of inflation may spread to other countries. Similarly definition can also take place.

5. Change In Gold Out Put :-
The changes in out put of gold can bring changes in the prices level. With the discovery of gold prices will rise and due to the fall in out put prices will fall according the quantity theory of money.

6. Automatic Operation Is A Demerit :-
The automatic working of the economic system under gold standard is not considered merit but as a demerit.

Example : Let us suppose that due to any reason the demand of Indian goods increases, it would enable India the import of gold as a result of favorable balance of payment. Now this import of gold will increase the total supply of money in the country. Prices and income level will rise and if this process remains continue for long period it will become the cause of hyper inflation.

7. Adoption Of An Independent Monetary Policy :-
In the gold standard it is not possible for one country to adopt an independent monetary policy. If a country wishes to remain on gold standard and it must adopt a policy of deflation when gold flows out and policy of inflation when gold flows into the country ignoring its internal economics situation.


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